A shrinking supply of available homes for sale in Canada’s largest city continued to drive prices higher last month, bringing annual increases to the strongest in more than two years.

Benchmark prices climbed 1 per cent in January and are up 8.7 per cent from a year earlier, the Toronto Real Estate Board said Thursday. That represents the biggest annual increase since October 2017, the month controversial stress tests for mortgage eligibility were announced by the country’s financial regulator. The price gains are being fuelled by a combination of strong demand and shrinking supply, with new listings down 17 per cent in January from a year ago.

“Strong sales up against a constrained supply continues to result in an accelerating rate of price growth,” Jason Mercer, director of market analysis for the realtor group, said in the statement.

Toronto’s housing market is bouncing back after a dismal period that lasted through 2018 and early 2019. A combination of steady population growth, low unemployment and cheap borrowing costs have brought buyers who had been sidelined by the stress tests back into the market, Mercer said.

Still, the tightening supply has had a dampening effect on sales in recent months, with the number of transactions falling 2.7 per cent in December. That trend reversed sharply in January, with sales rising 4.8 per cent during the month on a seasonally adjusted basis to the highest level in more than a year.

The average sale price for a detached homes was $1,038,247 in January, up 10.5 per cent from a year earlier. Condo prices jumped 15.1 per cent from a year ago, to $630,047.

If Friday's gains are anything to go by, investors are champing at the bit

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